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Reo / Bank Owned Property Disposition

An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful trustee sale auction.  In the event a bidder does come forward at the trustee auction, the property “reverts” to the bank. It becomes an REO, or “real estate owned” property.

The bank now owns the property and the mortgage loan no longer exists.  The bank will handle the eviction or the tenant or owner, if necessary, and may do some repairs.  They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues.   As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property.

Each bank works a little differently in the way they sell their REO properties, but they all have similar goals.  They want to get the best price possible and have no interest in “dumping” real estate cheaply.  Generally, banks have an entire department set up to manage their REO inventory.

Once you make an offer to purchase, banks generally present a “counter-offer.”  It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible.  You should plan to counter the counter-offer.

Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days.”

Banks always want to sell a property in “as is” condition.  Most will provide a Section 1 pest certification, but not unless you include it in your offer and negotiate the point.  They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.

Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.

Even though you agreed to “as is,” always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections.  Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market.

Before making an offer, have your agent contact the listing agent and ask the following:

  • Are there any inspection reports?
  • What work has the bank agreed to?
  • Is there a special “as is” form?
  • How long does it take the bank to accept an offer?
  • How does your agent deliver the offer?

Offers are usually FAXED to the bank.  The listing agent needs your originals.  There is no formal presentation. Keep in mind: nothing happens evenings and weekends (banks are closed)

Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-qualification or better yet, a pre-approval letter and buyer biography.  Make your offer easy to accept. Remember that REO’s sell at pretty close to full market value and are not the deals they once were.